Making Shale Development Work for Ohio

Making Shale Development
Work for Ohio
Michael Farren
Department of Agricultural, Environmental and Development Economics

Amanda L. Weinstein

Mark D. Partridge, Swank Professor of Rural-Urban Policy

Swank Program Website: http://aede.osu.edu/programs/swank/

Sw ank Program in Rural-Urban Policy Summary and Report
June 2012

i
Pictured above: Youngstown, OH recently expanded its steel mill operations to produce pipes for used in shale oil and gas extraction.

Michael Farren Short Biography

Michael Farren is a PhD student and a Graduate Research Associate in the C. Wil-
liam Swank Program in Rural-Urban Policy in the Department of Agricultural, Environ-
mental, and Development Economics at The Ohio State University. His previous re-
search in this field includes investigations into the wind and biomass energy re-
sources in Ohio. His other research interests include policy analysis and the effects
of infrastructure and energy development on the U.S. and developing economies. He
previously earned his bachelor’s and master’s degrees in Civil Engineering at Ohio
State. Before joining the PhD program, he worked as a consulting engineer in the
roadway/bridge and structural engineering fields and served as an intern in the high-
way construction division of the Ohio Department of Transportation. He is a licensed
professional engineer in the State of Ohio.

Amanda Weinstein Short Biography

Amanda Weinstein is a PhD candidate in the Department of Agricultural, Environ-
mental, and Development Economics at The Ohio State University. Her research as
the C. William Swank Graduate Research Associate includes policy briefs about the
employment effects of energy policies and general regional growth and policy issues.
She is an OECD consultant advising on the economic impacts of alternative energy
policies on rural communities. Her other research interests include women’s role in
economic development examining women’s effect on regional productivity growth.
She was awarded the Coca-Cola Critical Difference for Women Graduate Studies
Grant to continue her work on gender issues in economics. She is also conducting
research on the skills most valued during a recession. Before starting her PhD at
OSU, she was a commissioned officer in the United States Air Force after graduating
from the United States Air Force Academy. As a Scientific Analyst in the Air Force
and then as a Sr. Management Analyst for BearingPoint, she advised Air Force lead-
ership on various acquisition and logistics issues. She is currently an adjunct faculty
member of Embry-Riddle University and DeVry.

Mark Partridge Short Biography

Mark Partridge is the Swank Chair of Rural-Urban Policy at Ohio State Uni-
versity. He is a Faculty Research Affiliate, City-Region Studies Centre, Uni-
versity of Alberta and an adjunct professor at the University of Saskatche-
wan. Professor Partridge is Co-Editor of the Journal of Regional Science and
is the Co-editor of new the Springer Briefs in Regional Science as well as
serves on the editorial boards of Annals of Regional Science, Growth and
Change, Journal of Regional Analysis and Policy, Letters in Spatial and Re-
source Sciences, The Review of Regional Studies, and Region et Develop-
pement. He has published over 100 peer-reviewed scholarly papers and co-
authored the book The Geography of American Poverty: Is there a Role for
Place-Based Policy? Professor Partridge has received research funding from
many sources including the Appalachian Regional Commission, Brookings
Institution, European Commission, Infrastructure Canada, Lincoln Institute of
Land Policy, U.S. National Science Foundation, U.S. National Oceanic and
Atmospheric Administration, and Social Science and Humanities Research
Council of Canada. His research includes investigating rural-urban interde-
pendence and regional growth and policy. Dr. Partridge served as President of the Southern Regional Sci-
ence Association and he was recently elected a fellow of the association.

Table of Contents

1 Executive Summary

3 Ohio’s Oil and Gas Jackpot

4 Hydraulic Fracturing in Ohio

8 Lessons from Previous Energy Booms

11 Williston, ND

12 Avoiding the Bust

18 Calgary, Canada

19 Conclusion

20 References

Making Shale Development The O hio State Un iversity
S w a n k Pro gra m i n Ru ra l- U rba n Po l i cy
Work for Ohio Summary and Re port June 2 01 2

Executive Summary

R ecent reports of the shale potential in Ohio,
Pennsylvania, West Virginia, and New York
make it appear as though these states have won
a multi-billion dollar jackpot. These states overlie Mar-
and an over-specialization of the economy towards its
natural resource wealth, which causes it to be more vul-
nerable to economic shocks. After the energy boom
subsides, these other sectors are smaller and weaker
cellus and Utica shale deposits containing natural gas than what they otherwise would have been.
and oil reserves. Recent innovations in hydraulic fractur-
ing (or “fracking”) and horizontal drilling methods have There are several main points that Ohio policymakers
made previously uneconomical shale resources avail- need to remember if Ohio is to be a future example of
able. Now U.S. and international energy companies find how to turn the resource curse into a blessing:
themselves in a breakneck race, trying to purchase min-
eral access rights from property owners in those states. 1. Short-term costs of extraction, particularly the hid-
Of these four states, Pennsylvania is the furthest along den costs, must be compensated for to ensure in-
the shale gas development path and its experience frastructure, amenities, and other public service
should help shape Ohio’s expectations. However, Penn- levels are maintained.
sylvania’s shale development is still nascent and cannot 2. Long-term tradeoffs must be countered by increas-
provide insight into the long-run economic outcomes of ing levels of human and physical capital and eco-
the shale gas boom, specifically some of the negative nomic diversity.
consequences that economists refer to as the “natural 3. Oil and gas industry taxes should be set appropri-
resource curse.” ately to cover the short-term and long-term costs
and tradeoffs of a natural resource boom.
The “resource curse” is the term coined for the seem- 4. Good governance is critical to ensure public poli-
ingly counterintuitive occurrence of slow long-term eco- cies and expenditures from the tax revenue are
nomic growth in regions rich in natural resources. In this effective and efficient, supporting all businesses
series from the C. William Swank Program in Rural- and industries.
Urban Policy at The Ohio State University, Weinstein
and Partridge (Dec., 2011 available at http://aede.osu.edu/ It is important to account for the immediate costs of
programs/swank) examined the expected short-run ef- natural resource extraction that are often ignored. For
fects on employment and income of the coming shale oil instance, hydraulic fracturing has been shown to cause
and gas boom in Ohio. This report takes the analysis a significant roadway degradation due to the large num-
step further by examining the long-run implications. bers of heavy trucks servicing the drilling sites. Addition-
ally, many of these costs are hidden, including potential
Resource economies experience a boom-bust cycle that damage to Ohio waterways. Such hidden costs of shale
follows the rise and fall of energy prices contributing to drilling should be incorporated into the energy compa-
the volatility of the local economy, thereby affecting eco- nies’ decision-making process, either through impact
nomic growth. Regions in the U.S. like Houston, Tulsa, fees, taxes or some other formalized structure. In order
and Williston, North Dakota are presented as repeat to minimize the negative effects on Ohio residents and
riders on the energy price roller coaster. Their differing businesses, the level of infrastructure and amenities
economic outcomes offer evidence that the first step in must be maintained, if not increased, over the long run
mitigating the boom-bust cycle is to foster a diverse to counter the loss of a nonrenewable resource.
economy, like that of Houston, which can weather the
sudden changes in fortune that extensive energy re- The most important effect may be the tradeoffs that
sources can bring. natural resource extraction induces. Natural resource
booms force regions to make a tradeoff between the
As the natural resources sector of the economy grows, it current payoffs associated with present extraction and
attracts workers, causing a shift away from other eco- future payoffs through maintaining current resource lev-
nomic sectors. The increased wealth flowing into the els for future extraction. Non-renewable natural resource
local economy from the resource sector increases local extraction permanently reduces a region’s natural capi-
prices and wages while driving other industries to relo- tal. Thus, it is important for Ohio to counter the reduction
cate to other regions with lower prices and wages. The in its natural resources capital with a corresponding in-
net result is the shrinking of the non-booming sectors crease in public and human capital (education and job

1

skills). Investing in education is especially crucial as term costs.
higher wages resulting from the shale boom and the
availability of relatively high-paying jobs provides a Finally, good governance is required to ensure that
disincentive for workers to obtain more education or this new tax revenue is spent appropriately. Good
skills. This effect has been noted in the coal-rich governance does not permit individuals, firms, or
areas of Appalachia. The underlying problem is that government officials to engage in rent-seeking be-
regions with lower levels of education have consis- havior. Rent-seeking is an economic term which
tently shown lower rates of economic growth. describes activities that attempt to use the power
structures in society to achieve personal gain, often
By taxing the natural resource extraction and using to others’ detriment. Rent-seeking behaviors can
that revenue to account for its short-term and long- also leave a government beholden to an industry,
term costs, some regions like Texas and Calgary, allowing the industry to dictate spending, the regu-
Alberta in Canada have managed to avoid the re- latory environment, taxes, and other public policies,
source curse. Conversely, Ohio’s current oil and rather than the government being an advocate for
gas severance taxes are noticeably lower than the all industries and citizens. It is still essential for gov-
top oil and gas producing states. Ohio seems less ernments to be efficient despite the influx of money
prepared to account for all of the costs associated that may come from oil and gas tax revenues. Gov-
with oil and gas extraction, although Governor ernments should allocate these funds effectively
Kasich’s proposal to increase oil and gas taxes is a and efficiently without becoming accustomed to
step in the right direction. In order to stay on the large tax revenues from the oil and gas industry and
right path, Ohio should ensure that this tax revenue spending like they have just won the lottery.
is spent appropriately to cover the short and long-

2


Ohio’s Oil and Gas Jackpot
A
ccording to recent reports on the shale potential source of revenue after that source has dried up or left
of Ohio, it appears that the state has won a $500 is unfortunately a common story. This begs the ques-
billion dollar lottery.1 This good fortune is due to tion: How does an individual or community go about us-
improved drilling techniques and technology that allow ing the sudden flow of cash to the greatest long-term,
the extraction of previously economically unfeasible un- preferably sustainable, benefit? Perhaps more impor-
derground reserves of natural gas and oil. Pennsylvania, tantly, what are the pitfalls that are to be sidestepped if a
New York and West Virginia share the good fortune of future bust after the economic boom is to be avoided?
being located above extensive deposits of the Marcellus
and Utica shale which carry the oil and gas trapped in Is the Boom Worth It?
porous portions of the rock. The extraction of oil and gas
resources from the Marcellus and Utica shales in Ohio is Although policymakers like to focus on the positive as-
still in its early stages, but extraction in Pennsylvania pects of a resource boom, especially the rise in employ-
began approximately five or six years before Ohio and it ment, there will also be substantial strains on Ohio com-
is already experiencing many of the effects that Ohio munities accompanying the boom. Hydraulic fracturing,
may soon face. Conversely, New York has had a mora- or “fracking”, the method used to extract gas and oil
torium on hydraulic fracturing since 2008, choosing not from shale, places a substantial strain on the public in-
to pursue these untapped resources because of the po- frastructure, especially the roads and water system. The
tential environmental costs that accompany this “winning sudden and somewhat unexpected influx of new work-
lottery ticket,” though this policy is currently under re- ers to the area adds to the strain on the local infrastruc-
view (CBS Moneywatch). ture, water and sewer systems, energy grid, and other
local services. If the infrastructure and level of services
This policy brief follows from the December (2011) pol- and public amenities are not maintained, the boom can
icy brief by Weinstein and Partridge that evaluated the leave an area especially vulnerable to a subsequent
short-term economic benefits of the shale resource, pre- bust. An economic bust due to either a drop in energy
dicting a modest increase in oil and gas-related employ- prices or other market forces can leave a community
ment as well as a more substantial increase in income worse off than before the boom began, providing an ex-
for state and local area residents. Policymakers often ample of the “natural resource curse”.
focus solely on job creation when discussing the merits
of shale development and other initiatives, but should This report will examine the nature of economic booms,
instead turn their focus to measuring the benefits specifically those caused by natural resource discover-
against the costs of shale development. This policy brief ies, and the associated bust when the resource is ex-
addresses some of the long-run costs regarding the hausted or prices drop. The concept of a “resource
natural resource curse mentioned in the previous report curse” – a situation where the abundance of natural re-
and addresses the strategy needed to tackle some of sources actually leads to slower economic growth - has
the short and long-term concerns that have been associ- been extensively investigated in academic literature
ated with similar natural resource booms in the past. (Corden 1984, Auty 1994, Warner & Sachs 1997 and
Papyrakis & Gerlagh 2007, among many others).
The lottery metaphor is especially apt in this case.
Many Ohio landowners now possess property that is A discussion of the origin of the resource curse will help
suddenly substantially more valuable than it was before. illuminate the underlying causes of the bust, which in
Additionally, if Ohio oil and gas taxes are increased to many cases is actually caused by the boom itself.
be comparable with other oil and gas producing states, Armed with this knowledge, recommendations toward
state tax revenues will also experience a significant in- avoiding the potential future economic bust will be pre-
crease. However, history is full of examples of poor sented along with policy suggestions that may help Ohio
spending decisions by political leaders flush with money alleviate the potential negative side effects of shale gas
from energy resources. The plight of governments or drilling.
communities who have depended too much on a single
1. Ohio’s State Geologist, Lawrence Wickstrom, estimates the resources recoverable from Ohio’s Utica Shale could be as high as 15 trillion
cubic feet of gas and 500 billion barrels of oil. Given April 2012 market prices of approximately $2 per Mcf (thousand cubic feet) of gas and
$100 per barrel of oil, the market value of each resource would be $30 billion and $500 billion respectively (Downing 2011; US Energy Infor-
mation Administration). For perspective, keep in mind that this would be over a 30 year period (or so). According to the BEA, the Ohio state
GDP was $477.7 billion in 2010, which would total $19.4 trillion in 2010 dollars over this 30 year period assuming a very modest 2% annual
real growth in GDP.
3


Hydraulic Fracturing in Ohio

M uch of the economic development from the
extraction of shale gas and oil is likely to take
place in the rural plains of northwestern Ohio
and the rolling hills of the southeastern Appalachian
are familiar with (see Figure 2). This area often covers
several acres in size and includes the drilling pad, gas
handling machinery (gas driers, compressors, conden-
sate holding tanks, etc) and often a holding pond or
region. Ohio’s shale resources are split between a small storage tanks for the substantial amounts of water used
portion of the state overlying the Marcellus shale de- for hydraulic fracturing and the subsequent wastewater
posit and a larger area over the Utica shale (see Figure called “flowback water” or “produced water”.
1).
Figure 2: Horizontal drilling tower in Pennsylvania.
The spacing of hydraulic fracturing wellheads, using the
horizontal drilling technology currently available, allows
for horizontal drill lengths of up to 10,000 feet. Chesa-
peake Energy, which has leased over 1.3 million acres
of mineral rights, has said that it anticipates construct-
ing 12,000 wellheads, which could mean that a well-
head might tap an area of 125 acres on average and
that wellheads might be spaced about every ½ mile
(Chesapeake Energy, 2011). The actual wellhead loca-
tions and density of construction will depend on the
shale resource itself, which can be surprisingly variable
over short distances, but there exists the potential that
nearly every Ohioan living east of Columbus will have a
wellhead (or multiple wellheads) located within a few
miles of his or her household.
Figure 1: Ohio Shale Resources

Source: Wikipedia

Both the Marcellus and Utica shales are rich in natural
gas trapped in the pores of the rock, while the Utica
shale may contain additional petrochemical compounds
and oil, increasing the value of the resource. Gas and
other compounds are released from the rock via hy-
draulic fracturing, a process which involves pumping a
mixture of water and chemicals into the rock at very
high pressure. This water, anywhere from 1 to 8 million
gallons per well, is the equivalent of two to twelve Olym-
pic-sized swimming pools and must be brought into the
site by truck or drawn from a local waterway or the pub-
lic water supply (Weinstein and Partridge, Dec. 2011).
Once the gas and water mixture is extracted, any
wastewater that isn’t reused must be transported via
Source: ODNR truck to an injection well for disposal. Many of these
The equipment required to access the shale gas is not injection wells are located in eastern Ohio and have
excessive, but it does require a substantially larger area already been used for Pennsylvania’s hydraulic fractur-
than the traditional oil or gas wells that many Ohioans ing wastewater (see Figure 3 on the next page).

2. For a more detailed investigation of Ohio’s shale resource and discussion of the process of fracking, see Weinstein and Partridge (Dec.
2011).
4

Figure 3: Class II Brine Injection Wells in Ohio has seen limited economic growth and dependence
on natural resource extraction in other forms, could
experience a new rejuvenation in the regional
economy from the development of shale gas re-
sources. However, the experience of southeastern
Ohio with past natural resource booms also serves
as a warning to regions and communities that de-
pend too much on natural resource exploitation to
achieve economic growth. This report is devoted to
addressing the actions that Ohio can take to en-
sure that the influx of cash from the extraction of
this natural resource will spur sustainable growth
that leads to lasting value.

What’s Causing Ohio’s Boom?
An economic boom can be caused by several dif-
ferent changes in the economy (Corden 1984).
First, production of goods can become more effi-
cient, often due to some technological change in
the production process, such as the creation of the
assembly line in automobile manufacturing. Sec-
ond, the global demand and price of locally-
produced goods could increase, meaning that local
producers would see increased revenue. Lastly,
and most importantly for Ohio, there can be a wind-
fall discovery of some resource which is essential
to the economy. A shale gas well has the potential
Source: ODNR to produce gas for 50 years, but 25-50% of the total
production is likely to occur in just the first two years
In December 2011, a number of small earthquakes (Innovation Ohio 2012, Green 2010). Figure 4 below
near Youngstown, Ohio were attributed to an injec- shows the shale gas boom that has already started
tion well accepting flowback water from Pennsyl- in Texas, Pennsylvania, and other areas in the U.S.
vania. It seems that the events in Youngstown con-
stituted an unusual case Figure 4: Shale Gas Production
of a well located above a
small fault line and which
was potentially drilled too
deep into bedrock which
then required higher injec-
tion pressures (WKNB 27
CBS). The sum total of
these circumstances al-
lowed the naturally-
occurring sei smi c
stresses to be released,
but this should not be a
concern for most other
injection wells (Phillips
2012). However, this inci-
dent does provide tangi-
ble evidence of the risks,
both known and unknown,
associated with fracking.

Southeastern Ohio in par-
ticular, which traditionally Source: US EIA 2011 Annual Energy Outlook reproduced from Weinstein and Partridge (Dec., 2011)

5

The Race for Resource Rights many Ohioans will see benefits from the extraction
of shale gas. This influx of cash to the state will in-
American and international energy companies are crease the buying power of the households holding
purchasing mineral rights to property overlying the these mineral rights, which can be associated with
Marcellus and Utica shales at an astonishing pace. increased economic development. Weinstein and
Chinese, French and Japanese companies recently Partridge (Dec. 2011) found that local areas will
committed over $8 billion to acquire mineral rights experience a significant increase in income due to
to drill into shale gas deposits from Texas to Ohio shale gas development. The first question is how
and Pennsylvania (Carroll and Polson, 2012). In- these property owners will use these payment for
deed, Table 1 indicates that 4 million acres of min- their mineral rights, since that is the first effect that
eral rights for shale gas in Ohio have already been the state will experience. Kelsey et al. (2011) find
purchased by out-of-state companies (mainly from that approximately 55% of the money residents re-
Oklahoma and Texas). Additionally, the belief that ceive in royalties is saved rather than injected di-
the western region of the Utica shale contains sub- rectly into the local economy, limiting the employ-
stantial reserves of oil has led the larger petroleum ment effects of the surge in income. Also, absentee
companies to take an interest in this resource, with landowners further limit these effects.
BP recently purchasing 84,000 acres (Carroll and
Polson, 2012; BP, 2012). Because many energy companies are headquar-
tered in traditionally prominent oil and gas-
Employment and Income Effects producing states, many of the shale gas workers
are likely to come from outside of Ohio. Kelsey et
al. (2011) find that 37% of Marcellus oil and gas
Given that the Utica shale in Ohio may represent a employment went to out-of-state residents. Addi-
more valuable resource than the Marcellus shale in tionally, because there are established energy sup-
Pennsylvania, the prices that Ohioans can charge ply chain industries in other states, many of the
energy companies for their mineral rights should be highly technical or industry-specific inputs into the
correspondingly higher. The consideration of appro- production process are also likely to come from out-
priate reimbursement for mineral rights contracts is side Ohio, limiting the supply chain effect of a shale
very important as it is one channel through which boom in Ohio.3 For this reason and others detailed

Table 1: Major Holders of Utica Shale Rights in Ohio (April, 2012)
Land Holdings Shale Active
(Acres) Headquarters Permits Wells*
Chesapeake 1,357,500 OK 82 58
Enervest & EVEP 780,000 TX 7 2
Chevron 600,000 CA 0 0
Anadarko 300,000 TX 3 7
Hess Corporation 185,000 NY 3 1
SA 154,750 France 0 0
Devon Energy Production 110,000 OK 2 2
Consol/CNX Gas 100,000 PA 3 2
BP 84,000 United Kingdom 0 0
Gulfport 62,500 OK 0 1
Rex Energy Corp 58,700 PA 0 0
Phillips Exploration 45,000 PA 1 1
Petroleum Development Corp 40,000 CO 0 0
HG Energy 30,000 WV 10 5
XTO Energy (ExxonMobil) 25,056 TX 2 0
Triad Hunter 16,000 TX 0 1
*Includes all wells classified as drilling, drilled, producing, and completed
Source: Ohio Department of Natural Resources http://www.ohiodnr.com/oil/shale/tabid/23174/Default.aspx , Ohio Shale
Coalition (Thomas et el. 2012), and Utica Shale Ohio http://oilshalegas.com/uticashale.html

3. Supply chain effects are the secondary economic effects that a new industry has on a local or regional economy. For example, a
new automobile factory might help create local industries for glass, rubber and upholstery.

6

by Weinstein and Partridge (Dec. 2011), local em- contemporaneous prices and demand for oil and
ployment impacts may be less than many Ohioans gas are the most important determinants of the
currently anticipate. course a boom will take, not the potential reserves.

It is important that policymakers remember that The current shale boom for several other states
employment increases are likely to be modest and began around 2006-2007 which coincided with dra-
communicate this fact to their constituents to avoid matic rises in natural gas prices (see Figure 5).
future problems arising from unrealistic expecta- Natural gas prices have since dropped, causing
tions. For example, many businesses expanded established shale gas industries in areas like Texas
after hearing policymakers tout the coming green and Oklahoma to stop increasing the rate of natural
jobs boom, only to be disappointed with some even gas production, as seen in Figure 4. Additionally, a
filing for bankruptcy when the employment impact warmer than average winter decreased natural gas
was more modest than they had expected (Dugan heating demands, leaving record amounts of gas in
and Scheck, 2012). storage (Funk, 2012). Shale gas discoveries have
also been made not only around the country but
Energy Prices are Paramount around the world which further places downward
pressure gas prices. Thus, focus has turned more
Often the excitement associated with a new re- recently to the oil potential of shale resources
source discovery in conjunction with increasing rather than natural gas. Figure 6 shows that al-
energy prices causes the benefactors to forget though oil prices similarly dropped in 2008, oil
about other determinants of an energy market, in- prices have since been increasing whereas natural
cluding the variability of demand and the possibility gas prices have remained stagnant or have de-
of falling energy prices. In the energy market, the creased.

Figure 5: Natural Gas Wellhead Price

Source: U.S. EIA http://www.eia.gov/dnav/ng/hist/n9190us3m.htm

Figure 6: Crude Oil Spot Price

Source: U.S. EIA http://www.eia.gov/dnav/pet/pet_pri_spt_s1_a.htm

7


Lessons from Previous Energy Booms

W e can look to recent natural resource booms,
specifically the oil boom in the 1970s and
early 1980s, to help characterize what the
shale gas boom may look like for Ohio. Figure 7 below
nificant efforts were made to diversify the economy and
improve its infrastructure and local amenities following
decreasing oil prices in the 1980s. Dallas and Houston
were chosen as examples of cities with highly diverse
shows regional employment growth (benchmarked at economies before and after the boom. Both cities had
1969 levels) for a number of communities starting in experienced oil booms earlier in their histories and were
1969 just before the oil boom. Casper, WY in Natrona able to establish an oil and gas supply chain that in-
County and Williston, ND in Williams County (in the cludes the headquarters for many oil and gas compa-
center of the Williston Basin oil reserve and the Bakken nies. Dallas and Houston also had initial advantages in
reserves) provide good examples of rural areas with economic growth as transportation hubs, which assisted
limited economic diversity before and after the energy in their development of large, diverse economies. As a
boom. Both areas experienced significant oil booms result, both cities have generally higher growth rates in
when oil prices spiked in the 1970s and subsequent employment than the U.S. average. Despite its advan-
busts when prices dropped in the early 1980s. After the tages over less-diverse economies in the smaller cities,
bust their employment growth, which had previously Houston still showed the effects of the oil bust via a pe-
surpassed the U.S. average growth rate, declined and riod of employment growth stagnation before rejoining
went through a period of stagnation, performing below Dallas’s high growth rate.
the U.S. average.
This range of community sizes and economic diversity
Tulsa, OK is a larger city than both Williston and Cas- provides a comparison of what similar regions in Ohio
per. Its economy is more diverse, especially after sig- might experience from the shale gas boom. A key les-

Figure 7: Total Employment and Previous Oil Booms in the U.S.

Source: US Bureau of Economic Analysis

8

son here is that the energy economies that A variant of this effect is called “Dutch disease” be-
“permanently” gain the most jobs are (1) more di- cause of the well-known example involving the
versified, using their wealth to attract new industries Netherlands.4 The resource curse is present across
outside of energy and (2) large enough to have en- countries and also at the disaggregated county
ergy industry headquarters and an entire energy level and left unchecked these effects imply sub-
supply chain. Unfortunately for Ohio, many compa- stantially reduced standards of living for future gen-
nies will likely select Pittsburgh as their regional erations relative to non-resource-intensive counties
headquarters for their shale gas production due to (Black et al., 2005; James and Aadland, 2011; Kil-
its size, central location in the Marcellus and Utica kenny and Partridge, 2009; Papyrakis and Gerlagh,
shale region, and a long established oil and gas 2007).
industry. Shell Oil has already selected a site north-
west of Pittsburgh in Monaca, PA as the location of The root cause of the resource curse is the trade-
their forthcoming multi-billion dollar ethane cracker offs that it induces. Southeastern Ohio and Appala-
to process shale gas products. Nonetheless, the chia in general has seen the effects of this for sev-
most important element in avoiding the bust is hav- eral generations. Central Appalachia has historically
ing a highly diversified economy, which is still pos- been dependent on its mineral wealth, especially
sible for Ohio to achieve. coal. The availability of relatively high-wage, low-
skill jobs creates a disincentive for people from that
The Seeds of the Bust are Sown in the region to invest in higher levels of job-related skills
Boom or advanced education. This in turn limits the poten-
tial for innovation and for other industries to grow in
Countless historical examples show that, in general, that region, both because of the reduced job skills
a contraction will follow an economic expansion. of the average worker and because of the higher
The stronger and more sudden the expansion, the wages that a fledgling industry would have to pay to
harsher and more abrupt is the contraction. This is compete with the energy companies for workers.
especially the case when it is one sector of the This leads to a ‘vicious cycle’ situation where the
economy that is expanding rather than broad-based means to grow beyond an energy-based economy,
economic growth (Partridge and Olfert, 2011). The a strong and innovative manufacturing sector and
effects are compounded further when this economic high levels of human capital, are impaired from de-
boom is occurring in one specific region and the veloping precisely because the energy sector is so
impetus for the boom is external to the region, as is lucrative (see Figure 8 on the next page).
the case in Ohio. The global demand for energy is
the external force driving the race to capitalize on
the sudden availability of shale resources. Even if The Appalachian Coal Boom
natural gas prices rebound from their current slump
(refer to Figure 6) to allow for continuous extraction, Black et al. (2005) carefully document the experi-
Ohio would still face a similar situation that has un- ence of Central Appalachia during the coal boom in
dermined many economies before, that of the the 1970s and the subsequent bust in the 1980s.
‘natural resource curse’. They discovered that during the boom mining em-
ployment rose sharply (6.8% per year) while mining
The Natural Resource Curse wages increased at even higher rates (12.3% per
year). This encouraged younger males, which com-
The resource curse is an economic effect that typi- promise the primary demographic of coal miners, to
cally occurs in regions with economies based in work in the coal industry rather than seek advanced
large part on the use of natural resources. How- education or leave the region in search of other em-
ever, a similar effect can be created whenever an ployment. There were also spillover effects from
economy specializes too much in a single sector, mining into other sectors of the economy in terms of
especially when that sector is responsible for a increased employment and wages in sectors serv-
large portion of the value created in that economy. ing the mining industry. Using actual data and not

4 Dutch disease refers to the negative economic effects of natural gas discoveries in the Netherlands in the 1970s. The ensuing boom
and demand for workers raised the price of labor and appreciated the Dutch currency, rendering Dutch manufacturers less competi-
tive on international markets. After the initial boom settled down, employment declined in the natural gas industry, while simultane-
ously Dutch manufacturers found it hard to regain their footing in the international market, which created a long-lasting inhibition on
general economic growth. In general for local economies, a boom in one sector bids up wages and costs, making the rest of the
local economy less competitive in terms of attracting workers. In energy boom economies, this can be seen when other businesses
can’t find workers (for example, in the service sector or construction) or firms decide not to locate in the region due to the higher
labor costs. This leads to a less diversified economy, which is dependent on the boom industry and therefore more vulnerable to
economic shocks.

9

Figure 8: The Vicious Cycle of the Resource Bust

computer projections, Black et al. (2005) found in recent years. When the automobile industry
that for every 100 coal mining jobs created, 25 chose Detroit as their main operations and manu-
additional jobs in the rest of the economy were facturing base, the city and the local economy
created, giving coal employment a multiplier of prospered. However, the high wages that the car
1.25. Black et al. (2005) also observed increases companies paid and the large portion of the local
in wages for manufacturing workers in the coal-rich labor force they employed resulted in “crowding
counties compared to counties lacking a coal in- out” of other industries that might have grown up
dustry, which is evidence of Dutch disease effects. there. When the automobile industry fell on hard
Following the bust in coal prices, employment in times, so did the entire city. A dependence on
mining dropped faster than it had increased during natural resources or in any one industry can lead
the boom. Mining income also decreased substan- to an “all your eggs in one basket” situation, which
tially, causing economic decline and outmigration is difficult to recover from when there is a shock to
of workers. that specific sector. However, it is not just the
shock to the system but the nature of the boom
Motor City is only Idling itself which can impact the bust. Williston, ND in
Williams County is a good example of how a
The result of over-specialization can also be seen poorly managed boom can sow the seeds of a
in economic malaise that Detroit has experienced bust.

10

Williston, ND

Source: Johnson, 2012

Despite its previous oil booms, Williston, ND is a rape, abuse, and even prostitution. Calls into the
small city with a population of about 15,000 in 2010. police department increased by 250% from 2009 to
Williston again finds itself in the throes of a new oil 2010 (Shactman, 2012).
boom with a flurry of economic activity bringing
more jobs than its residents can fill, despite the School buildings are also overcrowded and the
relatively high pay associated with them. The aver- school district is underfunded. With 3,800 students,
age annual salary in Williams County has grown Williston primary schools have 57% more students
79% from 2005 to over $56,000 in 2010 (Oldham, than they were built to hold (Oldham, Jan 2012).
Jan 2012). Although experience has taught Willis- Teachers have to deal with overcrowded classes
ton that a bust may be on its horizon, right now Wil- and homeless students (approximately 100 of them)
liston is more concerned with the problems associ- with no housing available or any homeless shelters
ated with the current oil boom. in the small town. Williston schools need about $87
million to build 3 new schools and hire new teach-
One of the most visible signs of strain is on Willis- ers, but state lawmakers voted down a bill last year
ton’s infrastructure, most notably its roads and traf- that would have provided funding (Oldham, Feb
fic. Rural gravel roads mainly used by farmers now 2012).
have 800 trucks traverse them in a single day
(Oldham, Feb 2012). Additionally, the sheer number In North Dakota, oil companies pay approximately
of people flocking to this small city has put a consid- 11.5% in taxes which amounted to approximately
erable strain on its infrastructure and services which $2.6 billion in 2008 (Oldham, Jan 2012 and Feb
also includes the sewer system, water system, and 2012). This new revenue has helped fund projects
energy grid. Five new hotels and 1,200 apartments to improve drinking water pipelines and update the
and single family homes are planned in Williston. state prison in Bismarck, but the local share of oil
Williams County recently banned new construction and gas taxes is only 11% (Headwaters Economics,
of “man camps” until the infrastructure was up- 2012). Of the $1.2 billion that has been set aside so
graded to handle the increased demands (Oldham, far to help drilling counties, about $885 million re-
Jan 2012). This increased demand on housing and mains to be distributed. Many in Williston and other
other goods has bid up prices throughout the region drilling areas say it’s still not enough to cover the
increasing rent from an average of $500 per month strains on their small towns (Oldham, Jan 2012 and
in 2005 to approximately $2,000 (Shactman 2012). Feb 2012).
Prices for gasoline and groceries are 30% higher
(Oldham, Jan 2012). Hence, increases in real Williston is struggling to maintain its infrastructure,
wages are much smaller than the nominal increase services, and amenities let alone the able to im-
suggests. prove them. Residents are trading off temporary,
high-paying jobs in return for a reduced quality of
Williston’s few restaurants are packed with lines of life. Williston officials hope this boom will last at
up to an hour for lunch. Wait times for services are least 10 years, but expect to retain only about 30%
not likely to decrease as restaurants, hotels, and of the new workers afterwards. With limited public
retailers are finding it hard to compete with oil and infrastructure, amenities stretched, and jobs wan-
gas salaries to hire new employees. The limited ing, there will be few reasons for these families to
local amenities, including restaurants and other en- stay when the boom ends. Even if 30% stay, the
tertainment venues, have led to problems with alco- town of Williston will be left looking like the old
hol abuse which has also increased stabbings, ghost towns in the California gold rush (Ellis, 2011).

11


Avoiding the Bust

T he resource curse causes a number of adverse
effects on a regional economy, starting with the
initial boom. However, the long run effects may
be the most important impacts to mitigate. The negative
ways per ORC Sec. 5577.04) and a return flow of flow-
back water between 15% and 20% of what was used to
conduct the fracturing (Ohio EPA/ODNR 2011), then
each well on the drill pad will require between 17 and
effects of a resource boom in the short term and long 178 fully laden semi-trailers of contaminated water to be
can best be avoided by ensuring the following: shipped off-site. Since each drill pad will likely end up
being the source of 6-8 wells, then each drilling location
1. Short-term costs of extraction (especially the hidden will produce between 100 and 1425 fully-loaded semi-
costs) are addressed and compensated for. This trucks on Ohio’s roadways (Thomas et. al., 2012). The
ensures infrastructure, amenities and other public high density and number of wellheads planned by en-
service levels are maintained or even improved. ergy companies lead to the conclusion that Ohio road-
2. Long-term tradeoffs are countered to maintain or ways, especially in rural areas, will see an increase of
increase levels of capital and economic diversifica- heavy truck traffic far in excess of what they were origi-
tion. nally designed to withstand, especially rural roads. Note
3. Oil and gas industry taxes are set appropriately to that these impacts on roads have only considered the
cover the short-term and long-term costs and trade- wastewater that is transported away from the wellhead
offs of a natural resource boom. and not any actual construction, drilling or extraction
4. Good governance is critical to ensure public policies activities (See Figure 9 for an example of the trucking
and expenditures from the tax revenue are effective volume created by these activities). It appears that the
and efficient - supporting all businesses and indus- overall reduction of the functional life of Ohio’s roads will
tries. be substantial.

1. Accounting for the Costs of Extraction A report on the economic potential of shale gas spon-
sored by the Ohio Shale Coalition estimates that the
Nearly every activity has some sort of hidden costs. In monetary costs of roadway upgrades borne by the shale
economics the hidden costs that are not incorporated gas production companies would be $1.1 million per
into the decision-making process of the person that cre- wellhead (Thomas, et al. 2012). This value seems quite
ates them, but which still must be borne by someone low given the discussion above and taking into consid-
else, are called “externalities.” Essentially, the cost of eration that “road upgrades will be required for each
the decision is ‘external’ to the decision-maker. The pad, probably multiple times” (Thomas, et al. 2012).
most common example is that of a polluting factory Additionally, Pennsylvania has put a moratorium on any
causing an externality on its neighbors. Shale gas drill- injection of flowback water into underground disposal
ing will create its own specific externalities, for which Figure 9: Wellhead Construction
systems must be created to eliminate the impact or
compensate the affected parties. If this system is not
created, then the hidden costs of extracting shale gas
will be transferred onto Ohioans who are not benefitting
from the resource.

Roadway Infrastructure Effects

The clearest example of such hidden costs is the dam-
age to Ohio’s roadways that drilling and extraction activi-
ties will create. Each well will require 1 to 8 million gal-
lons of water for hydraulic fracturing, some of which will
flow back to the surface (Weinstein and Partridge, Dec.
2011). This ‘flowback’ water must then be transported
off of the well site, generally by large semi-trailer tank-
ers. Assuming a standard tanker volume of approxi-
mately 9,000 gallons (which approaches the maximum
gross vehicle weight 80,000 lbs. allowed on Ohio road- Source: Wickstrom (2011)
12

wells, causing substantially increased shipments of effects that impact the long-run economic growth of
this contaminated water into Ohio for disposal, for regions, contributing to the resource curse noted in
which the road damage costs are not being com- the literature. These effects are related to the idea
pensated by the drilling companies. of Dutch disease discussed earlier and the tradeoffs
that the energy boom will cause.
Other Hidden Costs
Despite the widespread prevalence of the resource
The increased roadway repair costs are only one curse, there exists some shining examples of com-
hidden cost associated with shale gas extraction. munities and regions that managed to avoid the
The case of Williston, ND provides an example of bust or at least the natural resource curse. Calgary
other such immediate costs, especially for more in Alberta, Canada provides an example of a city
rural areas, that are associated with the boom and that took advantage of their resources to encourage
the costs of extraction. Here is a short, but not com- long-run sustainable economic growth, creating an
plete, list of costs that should be considered for environment where workers and firms want to lo-
Ohio: cate despite the boom-bust nature of the energy
sector in the province.
 Roadway infrastructure repairs, especially on
rural roads and small bridges, that will reach Diversification is Key
their estimated lifetime amount of heavy truck
loads much quicker than anticipated when they In order to avoid or at least ameliorate some of the
were constructed. effects of the resource curse, Ohio should utilize
lessons learned from Calgary, Dallas, and Houston.
 Costs associated with preparing Ohio’s emer-
Ohio should focus on diversifying its economy. Re-
gency response officials and first responders
source rich economies are often less diverse. Less
for shale gas-related emergencies, should any diverse economies are more volatile and vulnerable
arise.
to economic shocks and downturns hindering
 Increased costs of construction and energy growth (Hammond and Thompson, 2004; Gunton,
workers on limited rural infrastructure, public 2003; Randall and Ironside, 1996). Lower industrial
utilities and social service networks. Some diversity has also been associated with higher un-
small Pennsylvanian towns have experienced employment (Izraeli and Murphy, 2003). On the
sudden surges in demand for wastewater treat- other hand, a diverse industrial base provides an
ment, schooling provision and traffic from the array of sectors for workers to find employment,
influx of shale gas industry workers (Cauchon, which will serve as an economic safety net when
2012). energy prices fall and gas and oil extraction slows.
 Increased costs on the public safety network,
especially on police and emergency medical To diversify its economy, Ohio needs to make in-
services, which have generally risen during re- vestments that make it more attractive to locate for
source booms in other areas (Shactman 2012). businesses and their workers. Promoting all firms
while encouraging small businesses, entrepreneurs,
Ohio must maintain and if possible improve upon its and innovation. Ohio should improve its business
public services, amenities, and infrastructure in or- environment by decreasing firms’ costs (through
der to mitigate the direct impacts of oil and gas ex- broader tax cuts or better infrastructure) and in-
traction and to compensate for the permanent loss creasing productivity (through a higher quality labor
of nonrenewable resources. Additionally, account- force).
ing for the immediate costs of oil and gas extraction
will promote economic growth in the short and long High paying energy sector jobs generally reduce
term. However, if these costs are not paid for by the the incentive for workers to attend college or pursue
energy industry, these costs will be pushed onto other forms of advanced education to develop skills
other industries reducing the competitiveness of the which contribute to higher regional levels of human
broader Ohio economy. capital. Conversely, a diverse economy is more
likely to have high-skill, high-wage jobs requiring its
2: Countering Tradeoff Effects of the residents to attain higher levels of education and
skill. High levels of human capital have been
Boom strongly associated with high regional economic
growth rates (Simon, 1998). Economic growth, low
In addition to the direct and oftentimes hidden costs unemployment rates, and high-skill high-wage jobs
that accompany the resource boom, there are side will attract high-skill workers from other areas.

13

Higher levels of human capital encourage innova- to counter the direct effects of extraction, but in-
tion and economic growth which in turn attracts creased to counter the loss of natural capital in the
more firms to the area, further diversifying the econ- long run. As mentioned previously, it is critical to
omy. If a virtuous circle such as this (shown in Fig- increase levels of human capital through investing
ure 10) can be created then much of the full effect in education and job-training, including STEM
of the natural resource curse will be negated. (Science, Technology, Engineering and Math)
scholarships at Ohio colleges and universities, with
The Solow-Hartwick Rule incentives for the students to keep their skills in
Ohio after graduation.
The discovery of reserves of non-renewable re-
sources forces regions to make a tradeoff between 3: Setting the Appropriate Level of Oil
the current payoffs associated with extracting the and Gas Taxes
resource now and maintaining current resource lev-
els for future extraction and future payoffs. Non- In order to fund the maintenance of local infrastruc-
renewable natural resource extraction permanently ture and other public amenities, an appropriate
reduces the natural capital levels of a region. amount of tax revenue from oil and gas companies
Countering the reduction in capital levels requires a should be collected. This revenue should be used
corresponding increase in public or human capital not only to maintain infrastructure and local ameni-
(education and job skills). This is known in econom- ties, but should also to ensure the local area is pre-
ics as the Solow-Hartwick Rule and, simply stated, pared for the bust as well as the boom. Appropriate
it means that to achieve the maximum sustainable oil and gas taxes will help ensure that Ohio and its
benefit from an exhaustible natural resource, gov- residents are benefitting from its natural resources
ernments should invest the profits produced from and that all of the value from shale gas and oil isn’t
that resource in forms of capital that have long- flowing to other states where the energy companies
lasting value (Solow 1974, Hartwick 1977). Thus, are headquartered (see Table 1). If state taxes on
public capital such as infrastructure, water systems, shale gas and oil extraction are too low, Ohio will
and public education should not only be maintained help out-of-state energy companies increase their
Figure 10: The Virtuous Circle of a Diverse Economy

14

profits at the expense of reducing the potential severance taxes on oil and gas extraction and to
benefit that Ohioans could experience from this re- use that revenue to lower state income tax rates.
source, while simultaneously increasing the state’s The levels of the proposed severance taxes are still
vulnerability to an economic downturn. Ohio’s oil relatively low compared to other energy-rich states.
and gas taxes should be comparable to other states Natural gas will be taxed only 1% of its market
so that energy companies face the same total cost value (which at the current market prices actually
of gas and oil extraction in Ohio that they do else- results in the same amount of tax as the current
where in the U.S. $0.20 per Mcf severance tax) and 4% of the market
value of oil and natural gas liquids (Vardon, 2012).
Ohio’s Current Taxes on Oil and Gas However, the severance tax on oil and natural gas
liquids drops to 1.5% during the first two years a
Severance taxes are taxes designed to reclaim a well is in production, during which it produces 25-
portion of the value lost when natural resources are 50% of its lifetime production (Innovation Ohio
extracted and consumed (Headwaters Economics, 2012, Green 2010). Since oil and natural gas liq-
2012). Ohio’s oil and gas severance taxes are uids are the most valuable portions of the shale gas
$0.03 per Mcf (thousand cubic feet) of natural gas resource, this means that a significant portion of the
and $0.20 per barrel of oil (Patton, 2011). At Janu- extracted value will be taxed at a much lower rate.
ary 2012 market prices, this corresponds to a tax In addition, energy companies will have a significant
rate of approximately 1.04% for natural gas and incentive to extract as much of the oil and gas as
0.2% for oil (very low compared to North Dakota’s possible in the first two years.
oil and gas taxes at approximately 11.5%). Ohio
severance taxes are currently used to fund the There are several issues with Governor Kasich’s
ODNR regulatory functions of the oil and gas indus- proposed plan from the standpoint of avoiding a
try. In 2010, $2.6 million in oil and gas severance resource curse. First, the use of severance taxes to
taxes were collected from the energy industry and displace income taxes may not be the most effec-
$9.4 million in total energy industry taxes, which tive method to avoid the adverse effects of the re-
includes the Commercial Activity Tax, state income source curse – unless it somehow promotes diversi-
tax, and property taxes (Innovation Ohio 2012). Fig- fication. In general a better use of the severance tax
ure 11 compares Ohio oil severance taxes to other funds to drive future economic growth would be to
oil-producing states while Figure 12 on the next create public capital (infrastructure or amenities) or
page compares Ohio’s taxes on gas extraction. In human capital (education) to counteract the de-
both instances Ohio is at the bottom of the rank- crease of natural resource capital. Lastly, the ef-
ings. fects of the income tax reduction would likely not be
realized until just before Governor Kasich’s re-
Governor Kasich’s Tax Proposal election.

Governor Kasich has released a plan to increase

Figure 11: Top 10 Oil Producing States Compared to Ohio
Effective Tax Rate on the Market Value of Oil

Source: Innovation Ohio http://innovationohio.org/wp-content/uploads/2012/02/Fracking-Fairness-and-the-Future-Full-Report.pdf

15

Figure 12: Effective Natural Gas Tax Burden

Source: Innovation Ohio http://innovationohio.org/wp-content/uploads/2012/02/Fracking-Fairness-and-the-Future-Full-Report.pdf
Note: The tax rate is based on the market value of the resource.

Ohio Democrats’ Counterproposal versity (degrees in STEM – Science, Technology,
Engineering and Mathematics for example). The
Ohio House Democratic lawmakers have coun- plan would also be strengthened by including in-
tered with a budget proposal that implicitly accepts centives for degree recipients to keep their skills in
the higher level of oil and gas taxes but would de- Ohio. Allowing too much latitude in how the sever-
vote all increased severance tax revenues to ance tax dollars are allocated risks the funds being
grants aimed at generating increased employment spent on short-run benefits, for political purposes
in schools and public service positions in Ohio negating the ability to resist the resource curse,
communities (Bell, April 2012). This plan could be which should be the primary goal.
a step in the right direction, since spending the
severance tax revenues in this way could enhance 4: Good Governance is Critical
the value of primary and secondary education,
creating higher levels of human capital, and in- Once the appropriate level of taxes is determined,
creasing public safety, an amenity. governments must then decide exactly how to allo-
cate the revenue to best mitigate the negative ef-
However, in the current form, the plan is somewhat fects of the shale boom while enhancing the posi-
vague and would be more effective at fighting tive effects. Good governance is critical to ensur-
against the potential of a resource curse if it had a ing these revenues are spent effectively. Taxation
stronger focus on the specific amenities to be cre- from a booming resource often provides a false
ated or if the funded education was directed to- sense of financial security, leading to increased
wards specific degree programs that would con- governmental deficits during the bust.
tribute towards economic growth and industry di-

16

Rent-Seeking Behavior5 should Shell decide to locate the plant in West Vir-
ginia (Bell, Jan. 2012). This race to the bottom
The motivations of policymakers and the quality of would limit the benefits West Virginia may get from
governance are perhaps the most critical factors in this cracker and may even cause negative impacts
determining the effect of a natural resource boom. to accompany the cracker development. Shell sub-
There is a large portion of the resource curse litera- sequently announced that Monaca, PA, northwest
ture that investigates the effect that public institu- of Pittsburgh, was selected as the site for the
tions have on the results of the boom. Weak gov- cracker due to the supposed suitability of the city,
ernance has a tendency to spur the resource curse its location and the 15-year tax exemption Pennsyl-
by allowing “rent-seeking” activities to flourish. A vania offered (Stuhldreher 2012).
“resource rent” in economic terms is the value of a
resource above the normal costs required to pro- Corruption
duce it (essentially, think of a “rent” as a “super-
profit”). In this case, the “resource rent” that makes Robinson et al. (2006) argues that the political in-
shale gas such an attractive commodity is the fact centives generated by the resource wealth deter-
that energy prices are set by the level of demand mine whether or not the resources are a curse. Cor-
and are often substantially higher than the cost to ruption is a major problem in the developing world,
actually extract and bring the energy resource to where the quality of public institutions is generally
market. low and policymakers wield power more as authori-
tarian rulers than as public servants. The temptation
There aren’t many goods in an economy that pro- to use revenues from the shale resources in Ohio in
duce “rents” like this, so they are highly sought after the pursuit of political ideology or favor-currying by
by anyone with the means to pursue them. This those in power might be difficult to resist for any
includes investors, companies, property owners, politician. Goldberg et el. (2008) found indications
and even governments. Whenever a new resource of political incumbents using oil revenues in Louisi-
like this is suddenly made available, it produces a ana and Texas to maintain their grip on power
race to determine who will be able to capture the through patronage systems where those in political
rents for themselves. Rent-seeking activities are office purchased political support by creating gov-
wasteful because they consume money and re- ernmental posts for their allies while at the same
sources without actually producing anything. Rent- time keeping taxes low or supplying increased pub-
seeking behaviors can also leave a government lic amenities to appease the voters. However, the
beholden to an industry, allowing the industry to position of power can also be twisted to create a
dictate spending, the regulatory environment, taxes, situation where energy companies exert undue in-
and other public policies. fluence on government officials to act in the compa-
nies’ interests, rather than the citizens’. Protecting
The Race to the Bottom against both forms of special influence is critically
important if Ohio is to avoid the resource curse.
The oil and gas industry will lobby to receive lower
taxes and other financial incentives from the gov- The Teapot Dome Scandal
ernment. This can lead to a “race to the bottom”
scenario where states compete to have the lowest Governmental corruption related to energy re-
taxes in order to attract oil and gas firms. Goetz et sources has a long history in the U.S. In the 1920s,
al. (2011) find that lower taxes are not a significant a bribery scandal surrounding the oil and gas indus-
factor in determining state economic performance try in Casper, WY, the Teapot Dome scandal, was
and that these financial incentives favoring specific called the “greatest and most sensational scandal in
firms or industries are associated with lower eco- the history of American politics”. The Secretary of
nomic growth. A possible example of this “race to the Interior Albert Fall was imprisoned for selling
the bottom” is the multi-billion dollar ethane cracker low-rate Navy oil reserve leases without competitive
plant that Shell Oil recently announced plans to bidding in return for gifts and no interest loans
build to process shale gas byproducts (Stuhldreher, (Cherny, 2009). Ohio should create systems
2012). Shell rightly expected the states of Ohio, wherein the potential uses of revenue from shale
Pennsylvania and West Virginia to compete for the gas extraction are strictly controlled to avoid the
plant by offering various financial incentives. The incentive of political office holders to use them to-
West Virginia legislature passed legislation that ward their own benefit.
would give the plant a 25-year property tax break
5. Rent-seeking behavior can be defined as individuals or firms in society attempting to influence decisions of the social authority (i.e.-
the government) to render judgments in their favor, generally to the detriment of others. Krueger (1974), who coined the term,
used the example of a domestic firm lobbying the federal government for import restrictions on foreign firms so that it could domi-
nate the domestic market and act monopolistically.
17

Calgary, Canada

In the province of Alberta within Canada, Calgary the development of industries outside the oil and
is one of the few examples of an energy economy gas industry including financial and IT services,
that has been able to move beyond its prominent high-tech manufacturing, agri-business, distribu-
oil booms to diversify its economy, leading to tion and transportation. However, many of these
more sustainable and robust economic growth. industries also built upon Calgary’s comparative
strengths, for example, in agriculture.
Oil reserves were first discovered in Calgary in
1914, but it was not until significant reserves were To diversify its economy, Calgary made invest-
discovered in the late 1940s that the oil industry ments that made it a more attractive place for
gained such prominence in the area, reducing the businesses and workers to locate. Calgary has
importance of the agricultural and ranching sector. since continued to grow and attract new workers.
From 1947 to 1965, Calgary’s population grew Calgary’s metropolitan area population is now
from 100,000 to 325,000. When oil prices spiked over 1.3 million. Calgary developed one of the first
in the 1970s, Calgary experienced its largest oil light rail systems of its kind in North America. It
boom which led to tremendous growth in its econ- has proved popular - 15% of Calgary’s downtown
omy. Close access to natural amenities in addition workforce commutes by public transit (Calgary
to economic growth attracted many people to Cal- Economic Development). These investments have
gary with approximately 3,000 people arriving helped make Calgary a transportation hub for cen-
each month during this boom (History of Calgary). tral and western Canada. It has also served to
Calgary quickly became an energy center with reduce traffic congestion and pollution.
numerous oil industry headquarters and a signifi-
cant energy supply chain. By encouraging its tourism industry, Calgary fur-
ther diversified it economy as well as its local
Although its population and economy were quite amenities to maintain and increase quality of life.
large, Calgary’s economy in the 1970s and 1980s Calgary promoted its “cowboy culture” based on
was inextricably tied to the oil industry and thus oil its ranching history and natural amenities utilizing
prices. When oil prices peaked in 1981, Calgary’s its proximity to the Rocky Mountains. Calgary pro-
economy also peaked and then began to decline. moted and developed recreational facilities includ-
Unemployment rates quickly became a significant ing those for winter sports. All of these invest-
problem for Calgary. Calgary soon realized that its ments helped transform Calgary into a global city
economy needed to be more resilient by becom- that hosted the Winter Olympics in 1988.
ing less reliant on the oil industry (History of Cal-
gary). Although the oil industry still comprises a signifi-
cant portion of Calgary’s economy, its diversifica-
Thus, Calgary began to make a concerted effort to tion efforts have limited this overspecialization and
diversify its economy. Calgary invested in re- have led to an economy that is more resilient and
search and development to encourage innovation. better able to maintain its low unemployment and
Tax credits and access to capital were offered to high income in the long run.
small businesses to further spur innovation and
new industries. Calgary specifically encouraged

18


Conclusion

I t seems that Ohio has won the jackpot. By luck of
location, the state sits on top valuable shale re-
sources and now the innovative combination of mi-
cro-seismic technology with hydraulic fracturing and
increase them along with human capital and workforce
development initiatives to account for the permanent
loss of natural capital from the oil and gas extraction. If
Ohio wants to avoid sudden economic shocks and the
horizontal drilling has allowed this resource to be long-run resource curse, then it must insulate its econ-
tapped. However, Ohio should take a second look at its omy by encouraging a broad base of diverse industries
‘winning numbers’ due to the potential economic effect to hire laid-off workers from the energy sector during
called the ‘natural resource curse.’ Despite the potential busts and promote long-run economic growth. In order
value that shale resources hold, previous experience to counteract all of the costs and tradeoffs associated
indicates that more often than not such potential is with a resource boom, Ohio must first ensure it is setting
wasted or ill-used. A bust and the resource curse may oil and gas taxes appropriately. Ohio has a good chance
not be the inevitable aftermath of Ohio’s shale boom. of being one of the few examples where a wisely and
Through preventative action, Ohio may at least be able consciously managed natural resources boom was used
to ameliorate the effects of the bust and resource curse, to foster an economy that is focused on lasting value if
if not avoid it completely. state leaders ensure that they craft policies with the fol-
lowing attributes:
First, the unsubstantiated exuberance surrounding shale
gas and oil should be moderated with the knowledge 1. Limit rent-seeking behavior (by citizens, firms and
that out-of-state energy companies responsible for ex- government entities) and avoid giving special treat-
tracting the resources will likely be the greatest benefici- ment to energy companies.
aries. Weinstein and Partridge (Dec., 2011) found that 2. Make certain that the hidden costs associated with
although the income effects may be significant, the em- the extraction of shale resources are adequately
ployment effects will be more modest than initial predic- compensated.
tions suggested. If managed well, Ohio’s leaders should 3. Mitigate the economically harmful trade-off effects
view this as a welcome opportunity for the state, but not that the shale gas boom will create.
as a silver bullet that is the solution to all the state’s
problems. Appropriately handling the expectations of There are plenty of examples of regions that were un-
Ohio firms and residents about shale development is the able to do this; regions that are suffering from the re-
first step toward ensuring a favorable outcome. Rather source curse. This final example shows that Ohio should
than relying on the energy industry to be the savior of instead take Norway as its role model. After discovering
the economy, Ohio should use this opportunity to build extensive energy reserves in 1960’s, Norway created
upon its own strengths- for example, developing an en- two sovereign wealth funds to manage and invest the
ergy supply chain able to build upon Ohio’s comparative taxes and dividends collected from the extracting the oil
advantage to compete with the established energy sup- and natural gas resource. These funds were created in
ply chain in traditional oil-producing states such as order to avoid the negative economic consequences of
Texas and Oklahoma, as well as Pennsylvania and the future depletion of the oil resource and the drop in
other states that are also trying to establish an energy national income that would follow. In addition, a budget-
supply chain. For example, Ohio has already begun to ary rule was created wherein the Norwegian legislature
build upon its manufacturing experience to meet the may only use a maximum of 4% of the wealth funds’
needs of this burgeoning industry. Steel mills in Youngs- assets to pay for government expenditures each year.
town, Ohio (pictured on the cover) are already expand- This was done in part to help avoid the currency appre-
ing to meet increased demand for steel pipes from the ciation effects of Dutch disease as well as to restrain
oil and gas industry (Schneider, 2012). rent-seeking behaviors by government officials. Also, by
the creation of two energy-wealth investment funds tar-
Ohio must then take steps to ensure the short-term geted towards international and domestic business in-
costs of extraction are accounted for by investing in investments, Norway has allowed for the diversification of
frastructure, public services, and amenities (including investment risk while at the same time provided a
decreasing ‘disamenities’ like traffic congestion and en- means to encourage a diversification of Norwegian in-
vironmental degradation). Moreover Ohio should not just dustry, the combination of which has resulted in a thriv-
maintain these levels of public capital but should work to ing economy with a high standard of living.
19

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